China helps revive Asia “decoupling” debate

By boosting domestic purchasing power, the looming rise in the yuan will add fuel to one of the biggest global economic stories of the new decade: the rise of the Chinese consumer.

China’s ravenous appetite for imports is already transforming the world economy. The country became the top export destination in 2009 for Australia, Brazil, Japan and South Africa. For Africa as a whole, China leapfrogged the United States last year to become the continent’s top trading partner.

Admittedly, a fat chunk of those imports are commodities and components that are processed for re-export to rich markets, undermining the case that China and its suppliers can truly “decouple” from the developed world.

“China will turn into a real engine of regional growth when it develops the technological capacity, and the human capital, to produce by itself and at competitive levels fully ‘Made in China’ exports, and when higher levels of income and consumption can trigger imports from the region to be consumed by China, not assembled,” said Yolanda Fernandez-Lommen, an economist with the Asian Development Bank in Beijing.

Yet something is stirring in the data that is reviving the decoupling debate. In the first quarter, China’s imports from Japan jumped 56 percent from a year earlier; from South Korea, 61 percent; from Australia, 64 percent; from Taiwan, 95 percent; from Indonesia, 105 percent.

“For many Asian economies and commodity exporters, China is now already as important as the United States,” said Yu Song, an economist with Goldman Sachs.

Those leaps are of course exaggerated by comparison with the depressed days of early 2009. And because commodity prices have shot up, volume increases are less impressive. Moreover, firms are restocking depleted inventories, and China’s massive stimulus spending is generating one-off demand for imports.

All those factors, plus still-sluggish global demand, help explain why China ran a trade deficit in March of $7.4 billion, the first time its trade had been in the red since April 2004.

But more and more economists are convinced that the growth in underlying Chinese domestic demand is genuine and stands to transform trading patterns, especially in its backyard.

Delinking

Mingchun Sun, a Nomura economist, notes that the share of “ordinary” imports—mainly consumed domestically—rose to 55.8 percent in the first quarter from 44.4 percent three years earlier.

“Obviously, such structural changes in China’s imports since 2007 are consistent with the government’s rebalancing efforts to increase domestic demand and reduce dependence on external demand,” he said.

But Sun sees broader forces at work. Car sales, for example, are growing strongly across the region: “There is evidence that Asian internal demand outside China is also strengthening, underpinned by loose policies and sound economic fundamentals.”

As for China, ANZ Bank economists Paul Gruenwald and Wei Liang Chang also identify 2007 as the year when consumption began to have a statistically significant impact on imports from East Asia.

China is less than one-third the size of the U.S. and eurozone economies, and its household consumption accounts for only 35 percent of GDP, compared with 70 percent in the United States and 60 percent in the EU.

But Gruenwald and Chang traced a recent unexpected rise in East Asian exports to the strength of Chinese consumption—not to demand from outside the region.

“In short, recent data would suggest that Asia has begin to delink from the West in the sense of generating more internal demand for its own products,” they said in a recent report.

One indication of China’s growing heft is that increases in its imports and retail sales during the financial crisis were greater than the losses in U.S. imports and retail sales, according to Goldman Sachs.

On current trends, that process can only intensify as Asian incomes, especially those of China, rise relative to those of Western economies doomed to years of post-crisis belt-tightening.